Why Europe needs research
spending

On 6 April 2005 the European Commission made a proposal for a spending
programme for research and development from 2007 to 2013. This programme, in
line with the Commission’s proposal on the overall budget for this period,
envisages a doubling of EU funds for research and development. This reflects
the EU’s political priority for growth and jobs. The Commission’s
proposal is backed up by an impact assessment study which examines the link
between research investment and increased competitiveness. The present
background note highlights some of the findings of the impact assessment. It
identifies the strong and positive impact that research and development in
general, and the European Framework Programme in particular, has on the European
economy. It describes the added value of working together at European level and
the effect on job creation within the EU.

Boosting Europe’s economic growth and competitiveness

The new Framework Programme (FP7) will boost Europe’s GDP, increase
exports and reduce imports, all of which contribute to reversing Europe’s
problems of slow economic growth and declining competitiveness.

Europe suffers from low economic growth, with the International Monetary Fund
recently revising downwards the Eurozone’s potential growth to about 2%
annually. Europe’s competitiveness – measured in terms of standard
of living, labour productivity and high-tech trade performance for instance
– is also declining. In 2002 the EU25 was running a trade deficit in high
tech products of €33.7 billion. The EU has been unable to increase its
share of this market, while countries such as China have experienced stellar
growth.

Research and Development (R&D) is the principal engine of productivity
and economic growth, a contention borne out by modern economic literature. One
recent study found that for each extra percent in public R&D, there is an
extra 0.17% growth in productivity. To put this into context, average annual
labour productivity growth in the Eurozone was 1.2% between 1995 and 2003. An
increase in EU R&D spending, especially if accompanied by increases in
spending at national level, could therefore have considerable impact on
productivity. Another study has found that a 0.1% increase in R&D intensity
boosts output per capita growth by 0.3-0.4%.

Public R&D has a considerable “crowding-in” effect –
each €1 of public funding for R&D given to business leads to
additional business investment of between €0.70 and €0.90. Taken
together with a recent Austrian report that found that a rise of business
R&D from 0.8 to 1.1% of GDP produced an additional 0.3% in growth, we can
see that R&D spending is important in economic terms.

This is a key point in mobilising private sector investment in research,
which should contribute two-thirds of the R&D spending target of 3% of GDP.
Last year’s EU Industrial R&D Investment Scoreboard showed that
investment by the top 500 R&D spending companies in the EU in 2003 was 2%
down on 2002, while it grew by 4% for the top 500 companies outside the EU.

The impact assessment includes the following table outlining the different
scenarios for investment in R&D at European level, as compared to a moderate
increase in FP7 funding:

Indicator

No FP7

Doubling funding under FP7, moderate growth in
FP funding thereafter

Doubling funding under FP7, rapid growth in FP
funding thereafter

Extra GDP (%)

- 0.84

+ 0.45

+ 0.96

Extra GDP when taking account of increases over time in
the quality of products (%)

- 1.31

+ 0.69

+ 1.66

Change in exports to outside Europe (%)

- 1.92

+ 0.64

+ 1.57

Change in imports from outside Europe (%)

+ 1.43

- 0.27

- 0.88

Source: Adapted Nemesis econometric model

These projections rely on a number of important assumptions:

- Member States will not reduce national investment

- FP7 projects will be at least as successful as past FPs and national
projects in attracting complementary private sector funding.

- FP7 will allow smooth conversion of new knowledge into new products,
processes and services.

FP7 can also provide the necessary framework conditions to attract foreign
R&D investment. Currently, the EU is losing R&D investment to other
countries; the diagram below shows flows of R&D funding.

In 2001 there was a net outflow of R&D funding from the EU amounting to
over €6 billion.

Strengthening Europe’s human resources

In employment as with economic growth, the European outlook is worrying, with
9.1% unemployment across EU15 in 2003. Analysts are noting an increase in
long-term unemployment and the deterioration of labour markets. While these
problems are particularly acute for the low-skilled, there is also a shortage of
high-skilled people, especially researchers. This calls into question the
EU’s ability to reach its target of 3% of GDP invested in R&D by 2010,
which will require at least 700,000 additional researchers according to latest
estimates.

An increased budget for European R&D could have a major impact on
employment, creating as many as 1 million jobs by 2030. By supporting
future-oriented industries, FP7 will support those sectors of the economy that
hire more high-skilled people and pay them better, and create more employment
than average: between 1997 and 2002 the growth rate was 11.9% for total
high-technology sector employment and 16.2% for knowledge-intensive industries,
as compared to 8.1% for total employment.

A recent Commission study found that technological change promotes employment
– countries with higher than average increases in the rate of growth of
Total Factor Productivity (TFP – related to improvements in the efficiency
of production of technological progress) also tend to have higher than average
employment growth.

Again, compared with a moderate increase in funds under FP7, we can see that
doubling of funds would have significant effect on employment in the EU:

Indicator

No FP7

Doubling funding under FP7, moderate growth
thereafter

Doubling funding under FP7, rapid growth
thereafter

Extra employment (#)

- 840,000

+ 418,000

+ 925,000

Extra jobs in research (#)

-87,000

+ 40,000

+ 214,000

Source: Adapted Nemesis econometric model

Investing at European level to add value

There are many good reasons to fund projects at European level. By doing so,
the EU encourages researchers to co-operate across national boundaries and to
share complementary skills and knowledge. This maximises scarce resources and
reduces wasteful duplication of research spending: better value for tax
payers’ money.

Many research activities are of such a scale and complexity that no single
Member State can provide the necessary resources. EU funding enables partners to
pool their funds, facilities and knowledge, culminating in a critical mass that
would not be possible at national level. Concrete examples of this phenomenon
include the Network of Excellence on Allergies and Asthma, or the Construction
Technology Platform.

By working at European level, industry has better access to the knowledge it
needs, and researchers have more certainty that their work will be taken up. By
providing a framework for disseminating research results across Europe, FP7 will
increase the chances of their being transformed into innovative products,
processes and services.

Increased competition is an effective way of promoting higher quality and
excellence. The creation of a European Research Council to support cutting-edge
frontier research should take this one step further, with individuals or teams
selected by their scientific peers. Higher quality output and more dynamism in
research will boost the European knowledge and industry base.

National research programmes still account for the vast bulk of public
research spending in the EU. However, there is considerable overlap in some
areas, while other areas are insufficiently covered. By improving the
coordination of Member States’ activities, while at the same time
addressing issues that are not given sufficient attention in national
programmes, FP7 will ensure more efficient spending on R&D across Europe,
and foster sectors with significant potential. For example, though FP6
represented 5-6% of total EU public R&D expenditure in general, it
represented much more in some cutting-edge areas with high-growth potential,
i.e. up to 30% of public investment in nanotechnology.